All eyes were on supermarket chain Tesco (LSE:TSCO) on 2 October as it released half-year trading results. As of September 2019, the group has a 26.9% share of Britain’s grocery market. Let us take a look at the the international retailer’s results to analyse how the shares could fare in the coming months as the UK may exit the European Union (or not).
Solid half-year
Tesco’s results beat expectations and showed an increase in operating profits to reach almost £1.4bn. As a result, management reported a 6.7% rise in first-half profits before taxes to £494m.
Like-for-like sales in the UK and Ireland increased by 0.1%. Group operating margin reached 4.4%. Management also reported that customer satisfaction has been improving across all measures and all channels over the past year.
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Its dividend has been hiked by 58.7%, underlying these robust results. The full-year dividend will be 6.75p for a current yield of 2.8%. Shares will go ex-dividend on 10 October.
Management highlighted plans to double the group’s online capacity and to increase its store opening programme in the UK.
Announcing CEO succession
Robust results were in part overshadowed by the unexpected news that chief executive Dave Lewis would step down next summer. Lewis said the decision was “personal”.
He will be succeeded by Ken Murphy who has held progressive roles at Walgreen Boots Alliance, the US-headquartered group that owns the UK high-street pharmacy chain Boots.
Lewis, who has been been with Tesco since 2014, is credited with the group’s successful transformation as discount rivals Lidl and Aldi as well as other grocery chains strive to increase their dominance. Lidl and Aldi have a combined market share of 14.1%.
Analysts highlighted his oversight in the £3.7bn takeover of food wholesaler Booker in 2017 as well as how he has overhauled relationship with suppliers. Tesco now operates Jacks, its own discount grocery chain.
Long-term shareholders may still remember that only a few years ago analysts were debating the survival of the group when management had to pick up the pieces after an accounting scandal that shocked the City in 2014. How could a FTSE 100 firm have overstated profits and “committed market abuse” as later concluded by the Financial Conduct Authority?
Under the leadership of Lewis, Tesco has been improving its performance. This is clearly visible in the company’s trading results as well as the stock price. Year-to-date, the shares are up 26%.
The next five years?
As the last quarter of 2019 gets underway, UK supermarket chains are likely to be affected by the imminent outcome (or lack) of Brexit negotiations. Consumer confidence is already dented. Supermarkets are not fully clear about the net effect of potential tariffs or borders on supply chains and costs. Thus the next few months in the segment may be lean for most retailers.
When he takes over Tesco’s leadership in the summer of 2020, Murphy is likely to face challenges different to those that Lewis faced five years ago. Although investors will likely give the new CEO time to establish his leadership, they will also want to see him successfully build upon the work of his predecessor.
The retailer is now trading at a forward price-to-earnings of 14.6. I’d look to be a buyer of Tesco shares, especially if there is any profit-taking in the coming weeks.
